Suppose Mason has utility u(x1, x2) = ln(x1)+x2. Normalize p2 = 1. Throughout this problem, you may assume that m and p1 are such that a positive amount

of x1 and x2 are demanded. In other words, you don't need to worry about corner solutions.

(a) Solve for the demand function x1 = D(p1, m).

(b) Let m = 10. Suppose the price increases from p1 = 1 to p1 = 2. What is

the total effect on demand for x1?

(c) Solve for m0 m, which represents how much extra income you would

need to give Mason in order to afford the original bundle at the new price.

Write the new imagined budget constraint.

(d) Decompose the total effect that you found in (b) into the income effect

and the substitution effect. Explain your answer.